JK: Underleveraged Underdog

For an economy to produce jobs it has to either increase productivity or increase spending or both
JK: Underleveraged Underdog

Another academic year has passed and thousands of youth in JK have completed their academic and professional degrees. In other parts of the world, education completion often marks celebrations. In addition to the joy of achieving an important milestone, completing education importantly opens up possibilities of adding fresh income streams in a family. Unfortunately, in JK, the scenario is not that delightful. After completing studies most of the students instead of adding to their family income, only end up adding to the already crowded space of unemployed youth. With over 25 percent unemployment rate in the state, the level of collective social stress, frustration and never ending hopelessness in our society has touched new depths of despair.

It is a matter of fact that income-generating jobs are a byproduct of growing economic activity.  For an economy to produce jobs it has to either increase productivity or increase spending or both. The most fundamental unit of an economic cycle is a transaction, which involves spending money or credit in exchange of goods or services. When more and more transactions take place in a market it infuses growth in investments, borrowing and spending, which in turn creates demand for human resource. The demand for human resource to meet the requirement of this growing economic activity is how employment gets created.

Facilitating and encouraging spending (transactions of buying and selling) in an economy is therefore a prerequisite for solving the riddle of unemployment.  However, in order to facilitate spending we need money, which is always scarce and can become a limiting factor for the growth of an economy. The globally adopted solution to overcome this limitation is the infusion of credit. This is why policy makers and economists around the world attach so much importance to credit expansion. Money plus credit amplifies total spending in an economy, which drives the transactions at a velocity which is otherwise not possible with money alone. Without credit, the only way to increase spending is by creating more income which can only be done by increasing productivity. Increasing productivity however is not as easy as increasing credit flow in the system. In today's world, developed nations improve productivity through innovation, technology, invention and research. Backwardness in these areas is the reason why developing nations like India and Pakistan have been very poor in achieving productivity driven growth.

Coming back to spending at macro level, which in our part of the world is predominantly done by the government, holds the key for growth in economic activity and job creation. Government spending which is at the core of a country's fiscal policy is spelled out every year in a very significant exercise, which is called as the union budget. And a more targeted spending for a state is spelled out in annual state budget. In addition to fiscal role, the government at central level also regulates the flow of credit in an economy through its central bank (RBI in case of India) by defining the monetary policy. Unlike fiscal policy which is an annual activity, monetary policy is a regular exercise done to check inflation or liquidity spillovers that emerge because of credit flow in the system. In terms of state's fiscal stance, GoJK, of late has attempted to re-balance the long term structural flaw in the state finances by improving deployment towards capital expenditure and public spending. However, given the status of our starved economy a lot still remains to be done.

 It is a matter of fact that JK contributes 1 percent of the national population; however it absorbs only 0.2% of the national credit. This clearly shows that our state economy is yet to fully leverage the potential of credit for economic growth.  It also shows that a major portion of our commercial transactions are done by money alone. This leaves us with a substantial scope for amplification of the spending side of the transactions in our state through credit infusion. This is a wide open opportunity.

In addition to quantity, it's the quality and nature of credit which helps an economy in truly harnessing its sustainable benefits. A credit infusion policy which focuses only on consumption or purchase of consumer durables might prove counter-productive in the long run and can result in ugly credit cycles. However, credit directed towards creation of value adding capital goods, infrastructure etc improves the productivity quotient of an economy which is not only sustainable but also multiplying in nature. A credit policy which finances capital goods, farming tractors and industrial machines more aggressively compared to financing entertainment consumer durables like TVs and mobile phones is surely a better credit leveraging policy that can positively change the economy in the long run. The right mix is therefore essential for a positive credit impact on economy.

Credit can be divided into three categories, according to how it is spent. At times it is spent wisely, on fresh capital and infrastructure, increasing the economy's productive capacity. Another part of credit which is predominant in our state is spent unwisely, either on consumption or on poorly conceived projects, such as setting up industrial units with a sole objective to grab subsidy or financing ones marriage. This type of credit adds nothing to the economy's productive capacity, but it does add to demand. This type of credit infusion results in higher inflation and might increase nominal GDP but not the real GDP. Credit in JK is of a very unique kind. It is also spent speculatively, on existing assets like land, commercial real estate and gold. These assets already exist in the system and can be purchased and repurchased without adding anything to the GDP directly. This kind of credit blocks resources and hardly adds anything to the economic growth or employment creation.

Our dependence on consumption driven growth with poorly directed credit remains a worry. However, conflict too is a very harsh and seemingly eternal reality. The low risk appetite developed by people of JK over last few decades drives majority of our savings and some part of credit towards low risk investment options like post office savings, real estate and bullion. This behavior of dumping savings in non-productive assets in an economy which is already credit starved is only worsening the situation.  The solution and responsibility lies with the government which takes the majority of mammoth spending decisions and influences the policy on state's credit disbursement.

In order to come out of the rot of this unemployment, it is essential to seriously think on improving the policies on productivity, credit quantity, credit quality and government spending.

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